Banking union proving thorny issue for EU

By Sarah Dilorenzo
Associated Press

Published: Tuesday, Oct. 9 2012 12:00 a.m. MDT

British Chancellor of the Exchequer George Osborne, left, listens to German Finance Minister Wolfgang Schaeuble, at the EU finance ministers meeting, in Luxembourg, Tuesday Oct. 9, 2012. EU finance ministers assess the budgetary situation in Portugal and address the challenges of the European financial crisis. (Yves Logghe, Associated Press)

LUXEMBOURG — European Union finance ministers grappled Tuesday with how to support their struggling banks and ensure that failing financial institutions don't have the power to drag down entire countries with them.

European leaders reached an agreement this year that the solution to their crippling debt crisis was to move closer together and adopt uniform rules on everything from budget deficits to banking regulations. The hope is that stricter rules will prevent the crisis from recurring and that closer coordination will give the countries the ability to respond better to future crises.

On Tuesday, finance ministers meeting in Luxembourg were set to discuss details of how a so-called banking union — one rulebook for all EU banks and a single supervisor for many of them — would take shape. Some countries were also hoping to implement a financial transaction tax, the proceeds of which could be used to help banks in trouble without using taxpayer money.

But there was no sign of EU-wide agreement on either issue as they began the meeting.

Europe is in its third year of its financial crisis, brought on in part by overspending and excessive government debt. Recessions in several countries have worsened the problem, and EU leaders have struggled to solve the twin problems of too much debt and too little growth.

Banks have played a big role in creating the eurozone's financial crisis. The government debt the banks had bought up during the boom times of the eurozone is now no longer considered a safe bet and the banks are struggling to unload it — usually at hefty losses.

Meanwhile, governments have been forced to step in to prop the banks up in many cases. But rescuing banks is expensive and has added to investors' concerns that European countries are simply spending too much.

The challenge now is to break this vicious cycle. Several countries want Europe's new permanent bailout fund — the European Stability Mechanism — to have the power to hand money to banks directly, rather than lending it through national governments as it does now.

Leaders have agreed that the European Central Bank must be put in charge as the supervisor of the banks before they receive money directly from the fund — and so many countries are pushing for that to happen by the end of the year.

But some countries, like Germany and the Netherlands, are dragging their feet on setting up the single supervisor, thus delaying the direct recapitalization, and also quibbling over which banks would be eligible.

Dutch Finance Minister Jan Kees de Jager said the union was important to breaking the link between the troubles of banks and those of their governments, but that speed was not the most important consideration.

"It's important that we do it step-by-step and that the substance is leading and not the calendar," he said, adding that the Jan. 1 deadline seemed too ambitious.

On Monday night, French Finance Minister Pierre Moscovici said he still thought a banking supervisor could be in place by the end of the year — and insisted that all 6,000 eurozone banks be supervised. That's another point of contention, with Germany apparently hoping that many of its smaller banks might evade such supervision.

Several EU countries are also considering implementing a financial transaction tax, as EU agreement appears impossible. EU rules require that at least nine countries agree to implement the tax in order for it to go forward. The EU commissioner in charge of taxation, Algirdas Semeta, said Monday in a tweet that seven countries had expressed interest.

The tax is also contentious, and many countries, like Britain and the Netherlands, fear it would send banks and other financial institutions fleeing from their shores. But France and Germany, which have led the charge on the tax, argue that it will cut down on some kinds of risky, speculative trading and could fund a security net when banks stumble.

Austrian Finance Minister Maria Fekter said Tuesday that she thought agreement was close.

"The tax would bring money for common security nets like a deposit guarantee scheme, the liquidation of banks or to reduce debt," she said.